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Frequently asked questions in finding the best mortgage rates and programs.

These questions and answers are informational purposes only. The aim of this site is to provide you with information, not advice. You should always consult a competent lender, real estate agent or attorney for help in circumstances unique in you personal financial situation and you local real estate market.

How do I compare different loan offers?

You should compare the contract interest rate, the APR (annual percentage rate), and the fees paid for the loan. In order to compare two loans you should obtain a GFE (good faith estimate) from your lenders. While some lenders may offer lower mortgage interest rates, their points paid and closing costs will raise their APR to the same or higher levels than a lender offering higher interest rates and lower fees.

What is a fixed rate mortgage?

A fixed rate mortgage offers the same interest rate for the entire contract of the loan. Unless it is an interest only loan, fixed rate mortgages have a set payment for the entire term of the loan, often from 10 to 30 years.

What is APR - annual percentage rate?

The APR of a particular loan reflects the total cost of financing a mortgage. It is a combination of the contract interest rate, discount points, and closing costs/fees paid to a lender when you obtain a mortgage.

The APR allows you to compare apples to apples when comparing loan offers from different lenders who may have widely different fees. A lender who offers a interest rate but has a much higher APR has fees which are adding to the costs to your financing. Simply put, the higher the APR over the interest rate offered, the higher the fees. You are paying more money to get the money.

The APR can be affected by the loan size and the term of the loan. A mortgage with a 15 year term will have a higher APR than a 30 year mortgage, even if the rate and fees are the same. Likewise, a $100,000 mortgage will have a higher APRr than a $200,000 mortgage, as the fees will represent a larger percentage of the smaller loan.

What are the closing costs of a mortgage?

Every lender will be different in both the amount and description of the fees associated with originating a mortgage. Closing costs or the fees include but are not limited to:

1. Closing, settlement and/or attorney fees.
2. Underwriting or administrative fees.
2. Pre-paid items, such as property taxes, mortgage interest in advance, homeowners
insurance and private mortgage insurance, if applicable.
3. Loan origination fees to the originator.
4. Appraisal fees to the appraiser
5. Credit report fee to the credit agency.
6. Messenger/runner fees.
7. Title recording fees.
8. Survey fee if needed by the title company or lender.
9. Title insurance for the lender.
10. Escrow contributions for real estate taxes and homeowners
insurance if applicable.
11. Documentation preparation fees

What is an adjustable rate mortgage?

An adjustable rate mortgage has an interest rate that will be fixed for an initial predefined term of the loan, normally from 1-7 years. An ARM will usually start at an interest rate that is lower than prevailing fixed interest rates of equal term. After the initial fixed period the loan adjust periodically to a margin over a particular index. The index is normally a widely published financial indicator such as the LIBOR, COFI or Treasuries index. If the margin was 3% and the LIBOR was at 3% the mortgage interest rate charged on the loan would be 6%.

An ARM will also have caps or limits as to how much the maximum interest rate may vary during each adjustment period and the maximum it may adjust over the life of the loan. You should ask each lender for the specific parameters (rate, index, margin, caps and term) of any ARM you are offered.

What is a mortgage broker?

A mortgage broker is an independent contractor that offers a number of programs from numerous lenders that they represent. Mortgage brokers can offer you a large selection of products available from numerous sources. Banks may have a limited selection of their own programs, limiting the choices to you for your needs. A mortgage broker will process your loan for submission to an investor for underwriting and approval of funding for the loan.

What is an origination fee?

An origination fee is the fee charged to cover the application for, and processing of, a mortgage provided by the mortgage broker. It is a fee charged by the broker/lender to be paid for by the borrower.

What is LTV (loan to value) mean?

LTV is simply the ratio comparing the loan amount divided by the property value. For example, if a home has a property value of $200,000 and the loan amount is $100,000 the LTV is 50%.

LTV is used to define the maximum loan possible for each particular loan program. There will be different LTV parameters for different loan programs.

Are discount point different than origination points?

Discount points are paid to reduce the interest rate of the loan. One point equals one percent of the loan amount. Lender and brokers also refer to the origination fee in points. For example, a lender who charges one point as an origination fee means that you will pay 1% for the lender to originate the loan.

Why do mortgage interest rates fluctuate?

Mortgage loans are sold on the secondary mortgage market competing with other financial instruments that fluctuate every day along with the worlds financial markets. When competing instrument rise or fall, so do mortgage bonds. .

What do I need to supply to start the mortgage process?

There are more complete descriptions on this site of what you need to provide to a lender, you will need you income and asset information (W-2's and pay stubs, bank statements, etc.) are also required. A copy of your purchase contract is also needed. In the event you are self employed you should plan on supplying your last two years income tax returns.

What does pre-qualifying mean?

Pre-qualifying for a mortgage means that the borrower and lender have reviewed information about your employment and debt situation. The lender has established an estimate of the loan amount the borrower may qualify for.

What does pre-approval mean?

Pre-approval is more complex in that it involves completing a loan application and being approved by a lender for a preset loan amount. With the exception of the property, the loan to the borrower is actually approved for the loan amount requested.

What is the difference between "locking” or "floating” an interest rate?

When you are shopping for a mortgage you will be quoted an interest rate that is available at that moment. In order to provide with that interest rate at closing time, the lender must lock in the interest rate for a term long enough to properly process your loan. The longer the lock, the higher the interest rate. Typical lock periods are 30-45 days. If you feel that rates may go down during the process you may choose to allow the interest rate to float and take advantage of a lower rate once you are closer to your closing date.

When can I lock in an interest rate?

Most lender will the lock to occur at the onset of the application process, anywhere during the process and just before preparing closing documents for the loan. The choice and the risk rest with the borrower, as any advice provided by the lender as to where interest rates will trend will be ill advised and most likely wrong.

What are escrows?

Escrows are the pre-payments of 1/12 of your annual real estate tax and homeowners insurance bill, to be held in an escrow account. Escrows accounts make the annual payments to the appropriate parties by the lender.

Can I avoid escrows?

In most cases, if your down payment is 20% or more lenders will not require you to pay escrows, although the privilege may come at a cost (read upfront fee).

How long does loan approval take?

Depending on your personal credit situation and the lender in question electronic can take place during the same business day. The paperwork, appraisal, title work and formal underwriting may stretch the closing out to a more reasonable two to three weeks.

Can I roll my closing costs into the loan amount?

As the maximum loan amount has been set by the LTV of the loan. most lenders will not allow you to roll in your closing costs when purchasing a new home. In a refinance transaction, the restriction might be less if the LTV does not exceed certain parameters.

How long does it take for a lender to close my loan?

Many lenders can go to closing within 7 days. However, an average of 30 to 45 days is normal. See above.

What is PMI ?

PMI is private mortgage insurance, protecting the lender in the event you default on your obligations of the loan. PMI allows borrowers to obtain higher loan amounts with lower down payments, all at a cost to the borrower. PMI is usually required on loans over 80% LTV.

How can I avoid Private Mortgage Insurance?

PMI is required if the LTV is 80% or higher. You can remove the PMI after you have either paid down your loan below 80% LTV, or your property has increased in value to the point were the new LTV is less than 80%. You will be required to have the home appraised to prove the new market value of your home if it has increased.

Many lenders will offer an 80/20 loan program, providing you with a first mortgage for 80% LTV and then a second mortgage for the remaining 20% at a higher interest rate. Recent legislation has made mortgage insurance deductible on you income taxes. Consult you tax advisor to see if you are eligible.

When should I consider a refinance?

The reason to refinance varies from person to person. When you refinance, you will pay closing costs or an increased interest rate. Divide the closing costs of the loan by the monthly savings on your mortgage payment to determine how long it would be before you break even. Consider a no-cost refinance if you can lower you interest rate and not incur upfront expenses on the mortgage.

What is a hard money loan?

Hard money loans, often referred to as private money mortgages are loans made by private lenders using their own money to fund the loan. Because the loan will not be sold on the secondary mortgage market, the private lender can be more flexible with their requirements for loan approval. With this flexibility comes costs, as the interest rates will be higher and the term for the loan will be shorter. These loans are used by borrowers who may not be able to acquire a mortgage through a conventional lending source.

What is a reverse mortgage?

A reverse mortgage is offered to homeowners who already own their home and have reached an age were they would like to withdraw the equity they have accumulated in their home. The money can withdrawn in a lump sum or in monthly payments. This loan is repaid when the last surviving borrower no longer resides in the home for more than 12 months. The home is then sold to repay the loan. You should check with each lender to learn the specifics of the reverse mortgage programs they may have available.

 

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